Romney vs. Obama, in Red and Blue Hues

Eight weeks out from Election Day, President Obama's post-convention bounce has put him 4-6 points ahead of Mitt Romney, exactly at the mid-September point at which outcomes have seemed set in the past. (The only memorable exception occurred in 1980, when Ronald Reagan trailed Jimmy Carter until the final debate on Oct. 28).

Some of this lead will prove only temporary, of course. But little evidence of tempered enthusiasm after arrival of weak August employment numbers seems to indicate that the president might get a "choice" rather than "referendum" election after all.

Romney may enjoy a slight money advantage down the stretch, but Obama's heavy early investment to build a key-state ground advantage and negatively define the former Massachusetts governor seems set to pay off, barring a breakthrough in the October debates.

We continue to predict a narrow Obama reelection, in tandem with a retained Democratic Senate and GOP House. Most notably, we see the populace more traumatized than angry, in contrast to the 2010 midterms, and so of mixed mind about scaling down the safety net. Moreover, we continue to believe many of the disproportionately white, college-educated and economically-stressed voters among the 6-8% undecideds are influenced by the historic nature of Obama's presidency. For this reason, Romney must do a better job in conveying how he might lead in a different direction, a stiff challenge in 2012, even if Romney were a "Great Communicator" like Reagan.

Meanwhile, should Romney-Ryan and the GOP fail to beat Obama and the Dems' increasingly redistributionist message, it could spell an altered economic course for the U.S.

While politicos use R and D abbreviations to refer to Republicans and Democrats, that could easily be reversed. As dramatically underscored during the two parties' recent conventions, the Democrats are the party of redistribution (Rs), while Republicans are the party of deregulation (Ds).

With Washington working its way toward an inevitable reboot of U.S. fiscal policy, an Obama reelection and retained Democratic Senate would foretell permanently higher spending and tax levels. One need look no further than the fact that the "Path to Prosperity" budget that candidate Ryan engineered through the House as Budget Committee Chairman would cut spending by $5 trillion over the next 10 years relative to Obama's plan and ultimately reduce the size of government (spending and revenues) to 20% of GDP compared to no lower than 23% under the president.

There would also be higher levels of environmental regulation and more restraints on hydraulic fracturing and offshore drilling in a second Obama term,- in contrast to the lower thresholds that might be expected under a Romney-Ryan/Republican sweep. And there would be less obstructed next-phase implementation of Dodd-Frank financial reform and the Affordable Care Act (ObamaCare).

The net of all these factors could be positive for some sectors, such as ag and highway construction, green industries, auto safety equipment manufacturers, hospitals, online gaming, and companies leveraged to NIH grants, among others. Meanwhile, a GOP White House and Congress would mean higher defense spending, lower taxes and the arresting of the Obama regulatory agenda, spelling R-E-L-I-E-F for the healthcare, energy and financial services industries in particular.

Meanwhile, the subject of tax reform has produced muddy political messaging, along with an odd assortment of potential winners and losers in the stock market.

Case in point on the campaign front was the former Massachusetts governor's efforts to clarify on "Meet the Press" that his idea of reducing upper income tax rates (as part of a 20% across the board cut also affecting the middle class) will amount to tax reform, rather than a net additional tax break for millionaires, because Romney would disproportionately eliminate deductions and exemptions for the wealthy as part of the base-broadening that would make such tax reform deficit-neutral.

Did that counter-message break through?

Somehow I doubt it, but only swing state independents and undecideds meaningfully know for sure.

Meanwhile, Republicans' sense of manifest destiny toward base-broadening tax reform seems a threat to big companies like GE (GE) on the corporate side, which has traditionally paid famously low rates as a result of exploiting provisions in the code and tax preparers on the individual side, as Americans might not have to rely as much on H&R Block (HRB) or Jackson Hewitt if the conservatives' dream of a simplified, flatter tax structure were ever realized.

Housing might seem more at risk to cuts in the Mortgage Interest Deduction (MID) under Republicans, but the industry would still net out more favorably if a GOP Congress and Romney administration help to moderate emerging regulatory standards that might shrink the credit box, allow less leveraging of capital and create new legal liabilities.

What does our blue-stock forecast foretell, more broadly, medium to long term? Perhaps a less immediate prospect for entitlement or tax reform, but nevertheless some breakthrough regarding American policymakers' inability to raise revenues. America could move toward, but stay short of, Euro-socialism. As a result, this might seem a net positive for bond markets and be well received by the rating agencies, including Moody's, which just issued a discordant signal about a likely downgrade in the event of an underwhelming resolution to the fiscal cliff issues this winter.

As I've been writing, a Romney-Ryan/GOP Senate victory would probably generate an equity market rally, borne not only of hoped-for relief for red stocks but, more immediately, earlier assurances of a less suspenseful avoidance of cliffhangers that have threatened wrenching across-the-board defense cuts and individual tax-rate hikes in January. Nevertheless, the GOP's need to tackle the debt ceiling by spring and tax reform by summer could begin to temper investors' enthusiasm in the New Year.

Despite some continuation of the partisan/ideological dogfight (with the Republican House and Democratic Senate once again at risk in 2014), I suspect that investors will be relieved (and markets might work their way higher) REGARDLESS of the outcome on Nov. 6, as uncertainty is removed and relative luster of U.S. markets is allowed to shine through.

Meanwhile, this positive momentum could be stoked, even under my blue-stock forecast, if Obama were to choose a budget-savvy centrist like Clinton-era White House Deputy Chief of Staff Erskine Bowles as his next Treasury Secretary. Admittedly, there has been NO evidence that Obama is interested in, or even capable of, such a repositioning, which he has resisted, unlike Bill Clinton after the former president's own disastrous mid-term elections of 1994. But having won the allegiance of the political left and locked in his signature achievement of health reform, the rewards for Obama from moving to the center AFTER reelection might be too alluring to ignore.